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Stabilizing The Markets

Computers trading billions everyday - sounds like a bad sci movie, right? Unfortunately this is now how some of Wall Street is operating. Gone are the days of men making deals over lunch, trades are increasingly performed in accordance with computer algorithms.

This is casino capitalism cyborg-style. In pursuit of a quick buck, humans are ceding control of financial markets to machines and are unable to intervene fast enough if things go wrong.

An explosion of high speed, high frequency trading carried out by computers is causing an increasing number of ‘flash crashes’ and undermining markets’ role in efficiently allocating resources.

In particular a Robin Hood Tax would target High Frequency Trading, where computers trade thousands of times a second, buying and selling according to pre-programmed algorithms, deceiving and preying on other machines. Sound unbelievable?  It exist right now, is known as High Frequency Trading (HFT) and accounts for more than 70% of all trades in US equities.

High frequency trading has the potential to cause havoc in markets for commodities like wheat and gasoline which are central to our economies and the lives and well-being of hundreds of millions of people.

The most dramatic flash crash occurred on 6 May 2010, when the Dow Jones fell by 9 per cent, with more than half of the fall occurring in just seven minutes. Shares in Accenture plunged from $40 per share to just $0.01. The Dow Jones fall was more than twice that on the day that Lehman Brothers collapsed.

The search for a quick profit has seen high frequency trading spread to bond, currency and commodity markets. On 3 February 2010 an employee at traders 'Infinitum' accidentally hit the wrong button and switched on a new oil markets HFT algorithm for just five seconds. In that time they lost more than $1 million and rocked the global oil price which spiked before losing 5 per cent of its value. You couldn't make this stuff up. 

In Hong Kong they were so concerned about the rise of this type of fast money trading that they introduced a Financial Transaction Tax (the mechanism of the Robin Hood Tax) as Charles Li, Chief Exectutive of Hong Kong’s stock exchange,  says it, “effectively limits high frequency trading, just like a highway with many toll booths discourages speeding.” Our Governments should follow the lead of Hong Kong and impose a Financial Transaction Tax to limit high frequency trading.

At the Robin Hood Tax campaign we are principally supportive of a Robin Hood Tax because of the revenue it could raise. However, if it also acts to reduce risky gambling and make the world economy safer that can only be a good thing. 

Markets should work in the interests of society – not the other way around. A Robin Hood Tax would be a big step towards a world in which finance behaves responsibly and pays its fair share.

The Reality

Lets start with the numbers. Experts now estimate that computer generated algorithms now account for more than 70% of all trading in US equities , and over half of all trades on Wall Street.

At one point, during the infamous 'flash crash' of May 2010, one type of contract changed hands 27,000 times in just 14 seconds. 

During the financial crisis of 2008 financial markets had spiralled out of control – complex derivatives valued at billions became worthless overnight. The speculative banking business model of Wall St had crumbled and brought our entire economy to its knees.

By targeting speculative casino-style trading, a Robin Hood Tax would help bring the sector back under control, help steer us away from future crises and reset the economic balance away from an over-reliance on fast money back on to Main Street.

In particular a Robin Hood Tax would target High Frequency Trading, where computers trade thousands of times a second, buying and selling according to pre-programmed algorithms, deceiving and preying on other machines. Sound like science fiction?  It exist right now, is known as High Frequency Trading (HFT) and accounts for more than 70% of all trades in US equities.

Every so often several algorithms spiral out of control, throwing stock prices into chaos. During the infamous 'flash crash' in May 2010, the Dow Jones Industrial Average (a stock market benchmark) had fallen by over 9%. To put this in context, this is more than twice the fall that occurred the day Lehman Brothers collapsed (15th September 2008) heralding the start of the recent financial crisis.

Just like in the Indy500, you need a fast car, but if you can't get round the corners, you will never finish the race. A Robin Hood Tax could make the financial markets and our economy stick to the road and handle the corners.

What Robin Can Do

High frequency Trading is an extreme example, but it symbolises how technology, a lack of regulation and a thirst for profit and allowed the financial sector to grow out of control. There has also been a huge increase in derivatives, making the volume of financial transactions increase to more than 70 times the size of the world economy. Many serious commentators believe this volume is dangerously large and de-stabilising, and that many of these transactions are, in the words of Lord Turner, chair of the UK's Financial Services Authority, ‘socially useless’.

At the Robin Hood Tax campaign we are principally supportive of a Robin Hood Tax because of the money it will raise to help the poor. However, if it also acts to reduce risky gambling and make the world economy safer that can only be a good thing. 

We know a Robin Hood style tax can do this, since many already exist.The Hong Kong authorities introduced a very small tax every time a stock is traded, dramatically reducing the incentive to use computers to trade stocks at lightning speeds because the tax outweighs the wafer thin profit margins that these trades rely on. However, for longer-term investors the tax is small enough to be barely noticeable. That's why Hong Kong continues to be one of the world's leading financial centers.

This is exactly what nobel prize winning economist James Tobin had in mind when he first developed the tax in the 1970's. He had envisioned a tax that would  “throw some sand in the wheels” of international finance.

Now, more than ever, his ideas for what we call the Robin Hood tax would help to rebalance the American economy and put us on a stabler footing for the future.

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